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Is It Necessary to Put Down 20 Percent to Purchase a Home?

By Mike in Mortgages with 0 Comments

Over the last couple of years, many prospective buyers of condos in downtown San Diego came up short of sitting down at the closing table because the sellers’ market lasted longer than expected. In 2019, things are looking better for house hunters. According to a late January report published by the National Association of Realtors, San Diego is one of the housing markets presenting the largest increases in active listings. What this means for buyers is a lower potential of having to endure bidding wars, lower listing prices, and sellers who are more motivated than last year.

Something that’s unlikely to change in 2019 is the need for buyers to come up with down payments—preferably, 20 percent of the final price—when looking at San Diego condos. The down payment requirement may be lower in some cases, but lending flexibility tends to get a little trickier with condos, lofts, and penthouses. Here are some lending aspects to keep in mind when considering a condo purchase in San Diego.

Loan-to-Value (LTV) Considerations

First things first: risk aversion has become a cornerstone of the mortgage lending industry, and more so when it comes to condominium properties. Whenever 20 percent down payments are mentioned, they should be thought of as risk mitigation factors preferred by lenders, even though borrowers can also benefit. Banks that issue mortgages like their purchase deals to feature LTV ratios of 80 percent or lower, which means they prefer buyers who can come up with 20 percent of the home’s value. This is known as conventional lending. LTV ratios higher than 80 percent may fall into the non-conventional lending category, and they tend to be more expensive for borrowers.

FHA Condo Loans

Section 234(c) of the Federal Housing Administration’s rules allow condo buyers to apply for special loans on condo properties, and these are deals that can be closed with as little as 3.5 percent down. The main requirement is that the condominium tower must be on a list of properties approved by the FHA.

VA Loans

Similar to the FHA program, Veterans Administration home loans can be used to purchase condos as long as they’re on an approved list, which is basically the same as the FHA list. Most borrowers who take advantage of the VA loan program don’t make a down payment at all, but they’re expected to make payments to cover what’s known as the VA funding fee, and this could result in monthly payments considerably higher than those of conventional mortgages closed with 20 percent down payments.

Non-Conventional Mortgages

Some banks will insist on 80 percent LTV loans for condos, while others will accept higher LTVs as long as they can be guaranteed by government-sponsored entities such as Freddie Mac and Fannie Mae. For example, the Freddie Mac Home Possible program offers options with LTVs as high as 97 percent, but they have a catch known as mortgage insurance, which consists of additional monthly payments borrowers are expected to make until the LTV ratio comes down to 80 percent or less as property value appreciates.

Although a 20 percent down payment is considered the norm, other options are available. If you aren’t sure how much your down payment should be, make sure you work with experienced downtown San Diego real estate agents who can help you navigate the details of home financing. Trust the professionals at 92101 Urban Living to be your expert guides on your home-buying journey. Give us a call today at 619-649-0368.